What Could Hurt Chicago’s Bid For Amazon’s HQ2?
Update Jan. 18, 2018: Amazon announced Chicago is among the 20 finalist for its second headquarters, known as HQ2. This story was published before the announcement.
What could turn Amazon’s smile upside down when it looks at Chicago’s bid for the tech giant’s second headquarters?
The due date for bids in this Willy-Wonka-esque competition is Thursday, and every municipality in the country is hoping to find a golden ticket in their chocolate bar. No one outside of Amazon knows for certain how the company will make its decision. The company’s request for proposals lays out some criteria it will look at, but they range from the super specific (“metropolitan areas with more than one million people”) to more ambiguous preferences that any city could argue it meets (“a stable and business-friendly environment”).
The Brookings Institute listed Chicago among the 20 metropolitan areas it believes are strong contenders, and the Anderson Economic Group puts the city in the No. 2 slot for netting the HQ2 golden goose.
But other projections haven’t been so optimistic. Moody’s Analytics this week ranked the nation’s largest metro areas and put Chicago in 25th place. The top five cities were Austin; Atlanta; Philadelphia; Rochester, New York; and Pittsburgh.
Even with the criteria outlined by Amazon, it’s not exactly clear how it will slice and dice the bids. Here’s a look at some issues that might make Chicago worried.
Amazon says it wants to hire 50,000 employees, and that could mean the online retailer will look at areas where job growth is huge.
But if creating jobs were like internet access, Chicago and Illinois are still using dial-up compared to other states and major cities. The city clocked in dead last in terms of job growth among the 12 largest metropolitan areas, according to a recent report from the U.S. Bureau of Labor Statistics.
When it comes to Illinois, a recent state report said “most comparisons show Illinois in the middle to bottom half of the nation in job growth.” And that’s not exactly a new development. During his first campaign, and much of his time in office, Gov. Bruce Rauner would discuss the state’s abysmal job growth numbers to anyone who would listen. As fate would have it, Rauner is the co-chair of the committee tasked with wooing Amazon.
How negatively will Amazon view these numbers?
It’s not easy to say. But the city has some wiggle room, said Don Haider, a professor at Northwestern University’s Kellogg School of Management and former budget director under Mayor Jane Byrne. He argued that looking at job growth numbers alone doesn’t show the whole picture. He said local colleges and universities churn out a highly educated workforce that could be enticing for Amazon.
“We’re still a magnet for educated young people,” he said.
When it comes to the tech labor pool among major cities in North America, Chicago ranked sixth, according to a 2017 study by real estate firm CBRE. San Francisco came in first, followed by New York; Washington, D.C.; Toronto; and Dallas.
But other analyses have been quick to harp on the state and city’s less-than-desirable job growth numbers.
The New York Times’ data blog, The Upshot, recently used Amazon’s criteria to weed out all of the competing cities down to one. Chicago got knocked out in the first round, which looked at … job growth. (FYI: Denver was the last city standing.)
Oh geez, where to begin?
Illinois has the worst credit rating of any state in the country. Moody’s Investors Service and S&P Global Ratings both list Illinois’ credit rating just above junk status.
A major factor for Illinois’ poor credit rating is the massive amount of money owed to public-employee pensions. Last year, the state’s unfunded pension liabilities jumped by $17 billion to a grand total of $185 billion, according to a recent report from the Illinois Department of Insurance. To help put that in context, the state’s operating budget for this fiscal year is $36 billion.
In addition to mounting pension costs, Illinois also faces an avalanche of more than $15 billion in unpaid bills, according to the state treasurer’s office. The amount of unpaid bills soared during the state’s historic budget impasse that lasted a crushing two years.
When it comes to Chicago, the financial outlook isn’t spectacular, either. Moody’s last month warned it could lower the city’s rating, which is three notches above junk status, and it took a particular dim view of the city’s ties to the “fiscally weak” Chicago Public Schools, which seems to be perennially in a budget crisis.
“Heightened fiscal distress at CPS could also be a source of credit strain on the city to the extent it results in a further burden on Chicago taxpayers,” Moody’s said. They’re basically saying CPS’ budget problems are bad news for people who live and pay taxes in the city.
When it comes to the city’s pensions, S&P earlier this year reviewed pension liabilities among the 15 largest U.S. cities and ranked Chicago the worst. The report said Chicago’s pension costs alone would come out to $12,427 per person.
Tom Gimbel, the founder and CEO of the staffing recruitment firm LaSalle Network, said he believes the stability of Illinois and Chicago will be a huge factor for Amazon.
“The economic stability of Illinois and Chicago, it makes you wonder,” he said, adding that other competitors, like Dallas, are located in states with no income tax. “I’m not anti-Amazon, but there are realistic reasons for why they wouldn’t come here.”
If the economic stability is a negative, the political landscape is just as shaky, Gimbel and others said. Gimbel said many of the people who are working to bring Amazon to Illinois will be up for re-election.
“Will Rauner be re-elected? Will Rahm be re-elected? Will Toni Preckwinkle be re-elected?” he said.
In a report this week, Fitch said the state’s low credit rating should be blamed on “governance weakness.” Speaking to NPR Illinois, Eric Kim, the head of U.S. public finance for Fitch, said, “The policy-making environment in the state has become so dysfunctional over the past several years that they have just been unable to make key fiscal decisions."
And while the governor’s office and the mayor’s office say they are working together on the hometown team’s bid, it’s not clear how in harmony the two are, especially after Rauner said he would help St. Louis in its own bid, said Haider, the former city budget director.
“The other competitors, you see cities and states working together, and it’s not abundantly clear if Rauner and Rahm can work together,” Haider said.
The city and state’s financial outlook raises questions about what kind of incentives both can offer, business experts said. Officials close to the local bid remain tight-lipped about what’s on the table, saying they don’t want to tip off competitors who can then offer a better deal.
“If Chicago and Illinois give away the farm, I don’t know if that’s in the best interest of taxpayers,” Gimbel said.
The leading Republican in the Illinois House doesn’t want the state to offer anything it can’t afford. House Minority Leader Jim Durkin (R-Western Springs) told WBEZ state political reporter Dave McKinney that he doesn’t want the state to “give away the store.”
“That’s what I think we need to start with: What can we afford?” Durkin said. “Is this something the legislature can accept?”
To get a sense of how hard some cities are playing the incentives game, New Jersey is offering up to $7 billion in tax breaks for Amazon’s HQ2.
Creating an incentives package that doesn’t shortchange taxpayers is one thing, but the aftermath once the deal is publicly disclosed could set off a round of headaches. Haider said once the offer is out in the open, it could create problems with companies that are already located in the state and might want a bigger slice of the incentives pie.
“You run the risk in this beauty contest of offering too much, and that sends a message to existing industries, and you’ll end up shooting yourself in the foot,” Haider said. “It’s kind of like playing a card game and you show your hand.”
And there’s also the risk of a public backlash where people ask, “What’s in it for me?” Haider said, adding that the city and state should be prepared to address questions over diversity hiring and training opportunities.
Every month it seems like President Donald Trump is tweeting about Chicago’s gun violence.
“It’s exaggerated and it’s hyped and it’s tarnished our reputation,” Haider said.
How will Amazon view Chicago, where more than 3,000 people have been shot so far this year?
“I think it’s a big deal,” Gimbel said. “If you’re looking at things apples to apples, that’s a very viable concern.”
One of Emanuel’s tactics for curbing the city’s gun violence is a hiring surge of police officers, but a recent WBEZ analysis found the city has only added a few dozen officers out of the 500 cops that Emanuel promised.
And then there’s CPS, which faced an enormous cash crunch that threatened to end classes early. And while state lawmakers were able to pass a bill (and override a veto from Rauner) that gives the school district more money, it’s not clear if the increase in state funds will alone be enough for the school district to balance its books in the future.
The Civic Federation, which annually reviews budgets from the city and CPS, casted some doubt on the long-term stability of CPS’ finances after state lawmakers stepped in, saying that the district is in “a severe cash flow crisis” because it doesn’t have money saved in a raining day fund to cover shortfalls. The Civic Federation also said it’s raising debts almost certainly means CPS will have to take on more borrowing, which could come at a heavy price for taxpayers down the road.
While Gimbel said he’s not opposed to Amazon coming to Chicago, he said if he had to guess, he’d say the city’s chances aren’t very high.
“It’s less than 20 percent,” he said.
Hunter Clauss is a digital editor at WBEZ. You can follow him at @whuntah.